We Think KOSÉ (TSE:4922) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies KOSÉ Corporation (TSE:4922) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for KOSÉ

What Is KOSÉ's Debt?

As you can see below, KOSÉ had JP¥500.0m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥123.9b in cash, leading to a JP¥123.4b net cash position.

A Look At KOSÉ's Liabilities

Zooming in on the latest balance sheet data, we can see that KOSÉ had liabilities of JP¥67.0b due within 12 months and liabilities of JP¥18.3b due beyond that. On the other hand, it had cash of JP¥123.9b and JP¥49.2b worth of receivables due within a year. So it actually has JP¥87.8b more liquid assets than total liabilities.

This short term liquidity is a sign that KOSÉ could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that KOSÉ has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact KOSÉ's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if KOSÉ can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While KOSÉ has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, KOSÉ recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that KOSÉ has net cash of JP¥123.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥25b, being 93% of its EBIT. So we don't have any problem with KOSÉ's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that KOSÉ is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com